Read India Right

A libertarian by orientation, Abhishek Bhattacharya is a former LAMP Fellow and presently works at Centre for Civil Society- a free market think tank.
His ideas and writings reflect the interplay of Philosophy, Politics and Economics.
Connect with him at @tathast_manush / abhi.bh.in@gmail.com

In his latest op-ed, “The feeding frenzy of kleptocracy“, Shri Sainath himself showed signs of kleptomania by robbing me of my mental peace by his arbitrary, irrational and unreasonable exhortations. He attempts to sway the public debate towards his version of “corporate welfare” bestowed by government on private sector but fails to look within before announcing his discomfort and displeasure.

The coveted author has been loyal to his service provider- MTNL- Mahanagar Telephone Nigam Limited (as flaunted by his email id) by not disclosing to the public the thousands of crores of public money that it sinks every year by the very virtue of its existence. It posted an enviable 4100 Cr loss last fiscal and is slated to make another 4800 Cr loss this year. The corporation, barely able to hold its navratna status, last made a profit in 2008-09 and has since then made a cumulative loss of Rs. 14,321 Cr. This colossal waste astoundingly is 21% of the revenue foregone (Rs. 68,008 Cr) for the ENTIRE corporate industry under the Corporate Income Tax head in the proposed budget.

The two city “public” corporation MTNL has achieved numerous feats in delivering with efficiency. Consider this, 41,611 employees are on its payrolls, all surviving on public money. In contrast, Airtel, having more than 10 times the size of its operations spread across diverse geographical locations with businesses in several different verticals, manages to deliver by employing only half that number- 22,000.

And, lest we forget how such an organisation continues to survive, we must genuflect in reverence of its selfless service rendered to the”kleptocratic” government which it counts as its biggest customer. Coupled with its blessings, the government honoured this devotion by offering 3G licenses to MTNL six months ahead of conducting an auction for private players giving a first mover advantage by design. Much to the chagrin of its promoter- H.E. the President of India, MTNL squandered the opportunity and failed to make any use of its six month lead and now plans to auction its spectrum to private players which is a privilege reserved for only “public” corporations.

On the other side of the fence, the government, in its own way of recognising efficiency recently penalised Airtel Rs. 350 Cr for entering into 3G roaming pacts in circles it didn’t own the spectrum. A move, that Shri Sainath is bound to appreciate since it would rein in our fiscal deficit and help finance our ambitious food security bill which would improve our malnutrition levels which to his immense disgust are even poorer than sub-Saharan Africa. Albeit, only if one digs deeper and looks at the standards for malnutrition that have been defined, would one able to poke holes like Dr. Arvind Panagariya has by showcasing his research to debunk the myths that have enamoured many.

The government to finance its profligacy, in addition to penalising the rich at a higher rate could just take out time from its leisurely schedule and shake the dust off its latest Public Enterprises Survey and take a customary glance. It would reveal that the government could have fetched Rs. 27, 602 Cr in 2011-12 by just managing to avoid losses in enterprises under its management, which is in fact 45% of the revenue foregone owing to the welfare bestowed to the corporate sector in the form of income tax waiver.

I would be watching in astonishment if Shri Sainath captures this side of the untold story in his next nerve rattling column.

You seem to be making the same point Sainath is no? Abolish tax concessions! And just as an aside, I loved how the embedded link to “research done by Arvind Panagariya” was a link to an article in that esteemed peer reviewed Health Journal called Tehelka!

The self evident facts Mr Libertarian, aren’t as obvious as you make it sound. And hence, from these facts you’ve deduced some absurd truths that is nothing more than a polemical point! Which is fair if that indeed was your original conception of this article.

But if you really want to engage with issues like nutrition, poverty, or even public economics, then reading Sainath or an interview in Tehelka will be just as absurd as appealing to your personal political slant for an understanding of, and a solution to these problems!

http://www.facebook.com/gizmotech Abhishek Bhattacharya

The point was not to abolish ta concessions. It was to compare the wasteful expenditure generated by public sector companies to finance our social sector programmes. If this logic sounds absurd to you than P. Sainath’s logic of comparing revenue foregone with social sector ooutlays is even more absurd.

One, because the calculation is convoluted and the actual revenue would have been less than the revenue foregone because the revenues wouldn’t have been there in the first place as lower taxes increases consumption and hence revenue. Two, it is an estimation whereas I compare hard figures.

The response is a short one just like the original short article in The Hindu. If I had to make an engaging debate about malnutrition, it would have gone int he longform section and would have quoted from his research papers and not some magazine. Interesting to see, how the publication matters to you more than its content, considering that interviews are more or less verbatim and uncoloured.

Neither do I intend nor do I want to propose a solution to the problems of nutrition or poverty. This space is too small to do that.

I am sorry to say but the article which you quoted does not plug holes into the research Dr. Panagariya has done. Like other authors, this one too has given his own sources which to my mind is just a “factual clash”.

SuchindranathAiyer

Mr. Sainath also missed out on big farmers. Agricultural land holdings and pucjase of agricultura land is restricted, effectively in mst parts of india to the Neta-Babu-Judge-Cop nexus who have established money laundering of great finesses. Their agents by up genuine agricultural produce at a premium for cash from poor farmers and sell it, against receipts, to co-operatives and Govt, procurers. This is one of the back bones of Indian “grass root democracy” i.e. hereditary, criminal ruling scum.

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Not to mention the priority sector lending goes to all the rich and big farmers and they are exempt from Income Tax too.

SuchindranathAiyer

Indian History and narrative is continuously
manufactured from political convenience with scant regard to facts. India’s
“political consensus” since before 1947 has been to steal rather than build.
Just as India’s Constitution and institutions were subverted from their very
inception, so is the truth:

http://www.facebook.com/akshika.bansal.9 Akshika Bansal

This article is a great critique on how we selectively are made to see facts which present a false picture! Corporates are NOT supposed to do any other social service than provide goods and/or services in the most efficient manner and thus there is no point taxing them and dis-incentivising them to do the same. one should go through this article-http://www.forbes.com/sites/objectivist/2013/03/12/give-back-is-one-of-the-worlds-most-impoverishing-commands/
Also, Sainath should read this and propose how to prevent PSUs to rob people of their money rather than proposing to loot people forcibly to make losses good via taxation!

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Thank you for your response, Akshika. The link you posted isn’t opening. Pls paste it again.

http://twitter.com/surenc1974 Suren

How about more ideas for Shri Sainath, in decreasing order of economic value

Free up LIC to make it’s own investment decisions, instead of propping up the share prices of PSUs

Stop forcing Public Sector Banks to park a portion of their deposits in Government debt, thereby freeing up money for businesses/consumers

Free up some of the prime real estate cornered for Govt bungalows in major cities, most of all Lutyens’ Delhi

http://www.facebook.com/akshika.bansal.9 Akshika Bansal

Haahhaha..awesome! I jus hope he takes cognizance of these ideas soon else he would remain a kleptomaniac!

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Brilliant.

Excellent points that i have been thinking for a while now. Imagine the yields these bonds will touch if this artificial demand goes!

Wow…you have given so much air for me to breathe.

Ganesh

Hear, hear!

http://twitter.com/lammot Arvind

I didn’t understand what Sainath said when he meant corporate income tax was written off? he doesn’t provide examples or explain, could you?

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Thank you for bringing up this Arvind.

Basically, the government incentivises corporations in investing in certain sectors or product lines by giving tax exemptions. This is basically to provide them a positive rate of return as otherwise under the present tax policy and other factors affecting the business make it difficult or uneconomical to run it.

Like IT companies are under an Income Tax holiday which if I am correct expired only last year. So, all the biggies like Infosys, TCS etc paid only the “Minimum Alternate Tax” which is around 20%, much lower than 33% Corporate Income Tax.

So, the govt. adds up all the tax exemptions and tags them as “revenue foregone” which is nothing but the unrealised revenue that they have got had the exemptions were not in place. However, people like P. Sainath fail to realise that the corporations wouldn’t have setup business in the first place had these exemptions not been there.

http://twitter.com/lammot Arvind

thanks for clearly explaining it.
but i would have to agree with Sainath, that this is revenue forgone, along with the PSU problems in your post, both are revenue forgone.
For a country that’s pretty steep in deficit any revenue forgone is horrible, but i would say a solution to make the expenditures efficient, and revenues more inclusive. Both these solutions will yield large returns, and it won’t need for us to touch the tax rates.

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Please read the mathematical argument that Ranjan has made.

Harsha

Sainath’s article says 35 billion$ was waived on taxes on gold and diamonds in the last 3 years. This year the central health budget was 7 billion$ and the education budget was 13 billion$ (total revenue was ~200 billion$, expenditure ~300 billion$).

Independent of the points made in your article, this assertion made by Sainath should not be sidelined. It should be verified. If true, this is a very important issue. Your points on wastage in PSUs should be seen as in addition to/complementary rather than in opposition to Sainath’s point. Using reduction in consumption as an argument will only work if you can show most of this massive amount would not materialize if taxed.

I thought the centre-right’s position included support for good governance providing basic services and infrastructure in the context of a private economy. If so, underspending on education(relative to what could be spent and in the context of a huge young population) is criminal. Modi was talking about underspending on skill development which involved much smaller amounts than what we are talking about. You can make a argument for private schools and school vouchers but that is separate from the actual budget amount.

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Hello Harsha,

Thank you for your comments.

If you ask me, my opinion would be to free up the government in all the tasks that it is doing which the private sector is capable of performing in the modern economy. The government should see the private sector as a complement and not as a substitute to government in the field of education, health and the like. eg The RTE Act could very well incentivise the private sector since its contribution in enrolling kids is already very high 35-40% as per ASER in rural areas and more than 50% in urban areas. Pakistan has done this in their RTE Bill (Read more in a piece I wrote sometime back: http://spontaneousorder.in/pakistan-passes-rte-bill-does-a-piecemeal-job-copy-pasting-bad-legislation-from-its-neighbour/)

The Customs duty on jewellery is actually helping India. Chidambram in fact announced several other measures which encourage people bringing back jewellery from abroad by increasing the limits.

How does it help?
Gold imports constribute a significant share in the high current account deficit that we have, So, it is in our interest to curb non-productive imports. (Gold in jewellery form is a very bad investment, more on that later). So, by encouraging people to get gold from outside and waving off their customs duty makes sense rather than importing the same which would show up in our imports.

So, these few measures which make good economic sense are being shown in poor light by misrepresentation of facts by half-knowledge.

Harsha

Thanks for responding. I too lean towards allowing giving public school choice, by attending private schools using government funding. RTE does this partially, but implementation hasn’t been good.

I am confused about what you are trying to say on the gold point. ‘curbing non-productive imports’ and ‘encouraging people to get gold from outside’.

Which is puzzling, because this would contradict Sainath. Is your point that local excise taxes on gold should be cut to prevent gold imports from abroad? Sainath, in the article specifically mentions custom duties, not excise tax.

The article that you mentioned is a little old. Also, it talks about curbing gold through increasing “import duty”. Reducing customs duty encourages people to buy say gold jewellery from outside and bring it back. This does not show up on our import account and therefore helps maintaining the CAD if not increasing it.

If more people who travel abroad plan and buy gold there, the demand would shift and there would be a reduction in CAD.

Increasing customs duty would only increase our tax collections. It would have an indirect impact on CAD- and that would be an “increase”. Consider it this way, people aren’t going to cut back on their gold purchases. The only way is to shift some of the demand for gold elsewhere. So, if people buy gold abroad it shows up a consumption on their accounts. Having indexed bonds is part of the same solution of shifting the demand elsewhere.

If we increases taxes and make it more costly for people to buy gold, they will just resort to smuggling. This used to happen pre-1991 and the underworld flourished on it. The real solution is to reduce inflation but since the govt. can’t do that, they are looking for easy solutions.

The Reuters article doesn’t really mean what you imply. It basically assumes that if the tax base widens and tax rates are rationalised leading to increased collections, the govt. would not increase its expenditure proportionately. If that happens, then the increased revenue would mean lower borrowing. Lower borrowing would mean lower printing of money and better availability of investment spiralling the economy into high growth.

But, this is far too simple. As seen in the past, during our high growth years of 2006, 07 and 08, we increased our expenditure to exorbitant levels. Instead, we could have focussed on reducing our fiscal deficit. But, we didn’t do that, and faced high inflation. Coupled with lower growth, our economy tanked.

Harsha

If I understand you correctly, lowering customs duty encourages gold to be directly purchased abroad using money earned abroad (Indian earned money used for purchase would add to the current account deficit.) Whereas import duty has the opposite effect, but increasing it is not feasible due to smuggling. This makes some sense but I am not sure how strong of an effect it is, considering that the government waiver of 12 billion$ is almost twice our health budget and most of the demand for gold is with Indian earned money. Of the 60 billion$ gold imports (which is part of the total 75 billion$ current account deficit), how much of this will be reduced by this waiver? Anyway, this comes down to an analysis of numbers, someone should do a report, and also analyze the feasibility of alternative plans like inflation protected bonds.

Ranjan Sreedharan

Abhishek, since you’ve mentioned the RTE and incentivising the private sector in education, may I ask you to take a look at this paper I’ve posted on RePEc; it’s titled: “Educating India’s poorest: A radical plan to attract private investment”. It’s available at this link: http://mpra.ub.uni-muenchen.de/23279/

I hope to edit and post it on CRI eventually, but till then, here’s the abstract:

“Despite its recent economic successes, India continues to have a vast
underclass where children do not go to school or are forced to drop out
early. In this paper, I describe a new plan to attract “for profit”
private sector investment into the education of our poorest and most
vulnerable children who, given current realities, are unlikely to make
their way out of the poverty trap anytime soon.

The idea is radical but at its core the plan is simple. Recognising that the private
sector can work wonders when there is a profit motive involved, this
paper proposes that the Indian government should invite them to set up
quality schools for India’s poorest with the incentive that as when
these children grow up and start earning their livelihood, the income
tax they pay to the federal government over their lifetime would go to
the entity that nurtured and educated them.

The financial viability of the model under Indian conditions is considered at Appendix A (pp.12-17). Appendix B describes a workable mode—with returns to
investors captured from future income tax payments—to attract corporate
investment in financing college education for talented, but poor,
American students.”

Thanks a lot.

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Hello Ranjan,

I read your paper. The model sounds interesting but I have certain reservations.

In the baselines case, the capital expenditure incurred during establishment of the school and buying assets has not been taken into consideration. This would further increase total expenses and breakeven period.

There would be an issue in matching the person who studied in the school and later moved to say, another school or dropped out later with their incomes even with advanced tracking system would be daunting. And, since these payments will come from the govt, the investor would be more wary of harassment and rent-seeking.

Education is a concurrent subject whereas Income Tax a union one. So, I don’t see why the entire burden of educating the children would be borne by the Union govt. alone. And, this would mean the schools opened under this scheme would be effectively only under the Central regulation which will impinge on the federal structure as states would like to regulate it as well.

I see voucher as a much simpler concept where all these transactions are hidden in the background. The gestation period is much short and the school owners can redeem the vouchers maybe at the end of each quarter giving early signs and lower loss of revenue in case of any problems.

It would be wonderful to discuss your paper in detail with you. My colleagues can help you too. You can contact me at: abhi.bh.in@gmail.com Our office is at Hauz Khas, New Delhi.

http://twitter.com/ganpat73 munusamy ganapathy

The abuse on public sector is not surprising but the fact is India remains one or people know that there exists others apart from them in the country was/is courtesy public sector.Its a fact that places reached by train and a public sector get the people out of ignorance and separatist tendencies.
Whether its NLC or vaizag steel plant or ordinance factories and depots across the country ,its they who convey an indianness representing all and increase the aspirations of the people
The assets of any public sector by its land holdings alone is several times of the investments and losses as reported and entire districts have developed courtesy public sectors and governmental organisations.
Caste,religion specific residences and villages where broken by the quarters in public sectors and if not for them there would have been no pilots or airhostesses or production engineers from tribals and other deprived sections of the country
My friend a tribal from tripura and a professional wanted to run a petrol pump when reliance was establishing its bunks across the country in hyderabad.He was simply told to apply in his home state irrespective of his credentials.Thats private players for you
Public sector losses are courtesy the basic minimum salaries and benefits from quarters,schools,parks,LTCs and lack of permission to use unfair means to get orders and most if not all who abuse them now would not have reached their current elite status if not for a family member who had a job in them in the previous generation

Reeti

Very well-argued article.

As you have very pertinently pointed out, the government must be held accountable for its reckless spending. In my opinion, it should be a combination of the two- 1)examine the PES and mitigate the losses that the government has incurred for its irresponsible behaviour and 2) tax the super rich even more heavily. The figure 42,800 is grossly inaccurate needs to be reviewed more carefully. So I feel like it should be a combination of the two rather than one or the other.

http://www.facebook.com/gizmotech Abhishek Bhattacharya

To your second point which I disagree with; taxing more heavily doesn’t make sense when your tax base is ultra low. Only 3% of Indians pay Income Tax. It makes sense to go after those who evade taxes rather than penalise the honest tax payers. But, our govt. is hell bent on defying logic.

The farm loan waiver scheme gave perverse incentives to those who defaulted on their payments and left the honest payers baffled. Similarly, the surcharge would disincentivise people on the margin to report their correct income and save on taxes.

The only solution is to expand the tax base and reduce tax rates. They could just, again, shake off the dust of one its own reports by Vijay Kelkar on tax reforms. It highlights all of this.

Ranjan Sreedharan

Hi Abhishek, Thanks a lot for this (long overdue) post. Few people in India seem to realise this but P. Sainath is essentially a peddler of chewing gum for the heart. His talent lies in spinning a good yarn; his writing style has a “homely” flair to it that stands in contrast to the stuffiness of his counterparts at the Hindu.

You’ve gone into the detail of Sainath’s arguments and provided a good rebuttal. However, even without getting into the specifics, there is a fundamental flaw in Sainath’s basic approach which is this: Sainath’s core assumption is that if a tax rate is x% and it fetches revenue of Rs.y crores, then a doubling of the rate to 2x% will automatically result in a doubling of revenue to Rs. 2y crores. Likewise, he assumes that if 2x% is halved to x%, the revenue realised will be halved from Rs.2y crores to Rs.y crores.

Given his ideological blinkers, and given that all these pinkos/ left lib types are essentially eco-illiterate (that’s why their articles are always heavy on the story or yarn content), that he should make so basic an error is actually no surprise.

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Hello Ranjan, Thank you for your wonderful comment. You have given a very nuanced argument which is the basic flaw in anyone who cries about the revenue foregone issue.

Thanks for explaining it mathematically so that it will benefit other users as well.

Ritesh Singh

Dear Abhishek

Being a free market supporter, I do believe that government has not business to be in business. However, I would like to qualify my statement here:

First, private sector can be as efficient or inefficient as a govt. owned company. Since, real markets are not perfect, privatization will not always work…I’ll give you a few examples;

Blue line bus service in Delhi…since you live in Delhi…you know it better;

Near monopoly abuse in real estate (DLF case) ….you can argue that it’s because of under or poor regulation…I do agree to this…but many PSUs too are not often allowed to be run on the basis of commercial principles even if many of them are nothing but commercial organizations owned by government e.g. railways, oil marketing companies

These are examples showing how privatization does not always give best result.

So, we need better regulatory environment…and let private sector and PSUs compete in an open market…imagine Air India (a heavy loss making company) announcing closer, the next day private airlines will double the fare. So we need PSUs but they must work on market principle…so I do agree with you on selling off MTNL and Air India as well but before that we should give the management a free hand to become efficient or be ready to be sold off…..

The problem is management in PSUs are never given free hand …and have to deal with pulls and pressures of our netalog….

regards,
Ritesh

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Thanks for your comments Mr. Ritesh. The article was just a response to P. Sainath’s op-ed and not a general commentary. So, I didn’t propose a model for privatisation, PPP etc but just called for selling of loss making PSU’s the truth is they would never have free hand because they come under administrative ministries and politicians are going to exploit them to their need.

There is such blatant misuse of power. CSR spend of these companies are spent in projects in MP’s constituencies. Fourth class jobs are given to kith and kin of loyalists etc.

And, all these losses are financed by the public.

Meghnad

I admit that we are losing out on Public enterprises. The government has no clue how to run most of them and thus we are incurring immense loses. But we all very well know the benefits given to private players by the government. Policies are twisted to suit their needs. Crony capitalism is the hot term at the moment.

Corporate tax waiver is distressing in such a scenario. Sure, there are losses due to ridiculous management of companies like MTNL, but then, at least a single entity is not unfairly benefited by it. Whereas in case of tax waivers, a clear benefit is given to one entity. It’s just unfair, that’s all.

That being said, we really need to privatize a few companies just for the sake of better management. We are stuck in the middle really, going either way might hurt us but we have to choose what hurts us less.
So Capitalism it be!

http://www.facebook.com/gizmotech Abhishek Bhattacharya

Thank you for your reply Meghnad.

The govt. (at least on paper) doesn’t give tax benefits to any single identified private entity. The tax sops are all there in the Finance Bill and announced in the Budget speech. If any company intends to make use of the tax waivers, they can do the same and this information is available publicly.

This is unlike the case of PSE making losses. They are picked out singularly and either given grants-in-air or loans or equity is infused. This is done on a case by case basis and there is no uniform policy.

Agree with you on your final comments. Capitalism it be!

Debasri Chakravarty

Good rebuttal! Govt should welcome private sector participation in most of the sectors for upliftment of our economy.

bapty seshasayee

I feel BJP SHLD HAVE ITS STATS SHOWING IN SIMPLE TERMS THE ACCOUNTABILITY.What does it mean to the economy the common man & society at large when power cut is nil when most of india has average 12 to 14 hrs a day or many regions no power at all. same way translate developed highways vs no highway at all.
the benefit at ground zero in an understandable language to aam admi.